Question

Use the midpoint method to calculate the price elasticity of demand for potato chips that increased in price from $2.00 to $3.00. The quantity demanded decreased from 100 bags a week to 50 bags a week at the local grocery store. Round to one decimal place.

Answer 1

Answer:

-1.67

Explanation:

Price elasticity of demand using midpoint method can be formulated as below:

Price elasticity of demand = {(Q_2 - Q_1)/[(Q_2 + Q_1)/2]}/{(P_2 - P_1)/[(P_2 + P_1)/2]}, where:

Q_1 and Q_2 are the volumes before and after price changes;

P_1 is initial price and P_2 is new price.

Putting all the numbers together, we have:

Price elasticity of demand = {(50-100)/[(50+100)/2]}/{(3-2)/([(3+2)/2]} =

- 1.67

Note: Negative sign indicate that when price increases volume will decrease.